There’s the rub. And markets are anti-inductive, so even if we had good examples, we should expect this one to follow a different path.
Remember the impact of the 1957 Asian Flu (116K killed in the US, 1.1M worldwide) or the 1968 Hong Kong Flu (only a bit less)? Neither does anyone else. I do not want to be misinterpreted as “this is only the flu”—this is much more deadly and virulent. And likely more than twice as bad as those examples. But not 10x as bad, as long as we keep taking it seriously.
The changes in spending and productivity are very likely, IMO, to cause both price and monetary inflation. Costs will go up. People will have less stuff and the average lifestyle will likely be worse for a few years. but remember that stocks are priced in NOMINAL dollars, not inflation-adjusted. It’s quite believable that everything can slow down WHILE prices and stock values rise.
Isn’t it also plausible that the impact of the virus is deflationary? (Increased demand for USD as a store of value exceeds the impact of the Fed printing money, etc)
Well if we had confidence in any major parameter shifting in either direction it would be tradeable, so I expect reasonable pressures on both sides of such variables.
I’d expect not. Overall, productivity is going down mostly because of upheaval and mismatch in supply chains and in efficient ways for labor to use capital. So return to well-situated capital and labor is up, but amount of capital and labor that is well-situated is down. Pure undifferentiated capital has a lower return, plus rising nominal prices means seeking returns is the main motivation, not avoiding risk.
TIPS seem like useful things to have in your portfolio, but rates are lagging quite a bit, so either the market disagrees with me, or the safety value is so high that people are willing to lose value over time. I think stocks will be OK—the last 40 years has seen a lot of financial and government backstops that mean we’re pretty good at protecting the rich on this front, and if you can’t beat ‘em, join ’em. Cash or the like is probably a mistake. I have no good model for Bitcoin or Gold, but my gut says they’ll find a way to lose value against consumer prices. Real Estate (especially where there’s not a large population-density premium) seems pretty sane.
Note: I am not a superforcaster, and have no special knowledge or ability in this area. I’m just pointing out mechanisms that could move things the other direction that the obvious.
remember that stocks are priced in NOMINAL dollars, not inflation-adjusted. It’s quite believable that everything can slow down WHILE prices and stock values rise.
In that case, TIPS (Treasury Inflation-Protected Securities) or precious metals like gold might be good investments. Unless the market has already priced it in, of course.
There’s the rub. And markets are anti-inductive, so even if we had good examples, we should expect this one to follow a different path.
Remember the impact of the 1957 Asian Flu (116K killed in the US, 1.1M worldwide) or the 1968 Hong Kong Flu (only a bit less)? Neither does anyone else. I do not want to be misinterpreted as “this is only the flu”—this is much more deadly and virulent. And likely more than twice as bad as those examples. But not 10x as bad, as long as we keep taking it seriously.
The changes in spending and productivity are very likely, IMO, to cause both price and monetary inflation. Costs will go up. People will have less stuff and the average lifestyle will likely be worse for a few years. but remember that stocks are priced in NOMINAL dollars, not inflation-adjusted. It’s quite believable that everything can slow down WHILE prices and stock values rise.
Isn’t it also plausible that the impact of the virus is deflationary? (Increased demand for USD as a store of value exceeds the impact of the Fed printing money, etc)
Well if we had confidence in any major parameter shifting in either direction it would be tradeable, so I expect reasonable pressures on both sides of such variables.
Economists mostly disagree with present market sentiment, which could be the basis for a trade: http://www.igmchicago.org/surveys/policy-for-the-covid-19-crisis/
Interesting. The idea here that the market is still on average underestimating the duration and thus the magnitude of the contraction?
I think that’s right.
I’d expect not. Overall, productivity is going down mostly because of upheaval and mismatch in supply chains and in efficient ways for labor to use capital. So return to well-situated capital and labor is up, but amount of capital and labor that is well-situated is down. Pure undifferentiated capital has a lower return, plus rising nominal prices means seeking returns is the main motivation, not avoiding risk.
TIPS seem like useful things to have in your portfolio, but rates are lagging quite a bit, so either the market disagrees with me, or the safety value is so high that people are willing to lose value over time. I think stocks will be OK—the last 40 years has seen a lot of financial and government backstops that mean we’re pretty good at protecting the rich on this front, and if you can’t beat ‘em, join ’em. Cash or the like is probably a mistake. I have no good model for Bitcoin or Gold, but my gut says they’ll find a way to lose value against consumer prices. Real Estate (especially where there’s not a large population-density premium) seems pretty sane.
Note: I am not a superforcaster, and have no special knowledge or ability in this area. I’m just pointing out mechanisms that could move things the other direction that the obvious.
Real estate likely just became significantly more illiquid at least for the next few months.
Why do you think nominal prices will keep rising?
In that case, TIPS (Treasury Inflation-Protected Securities) or precious metals like gold might be good investments. Unless the market has already priced it in, of course.